For the shortened week, the Dow was up 0.90 percent, the S&P 500 rose 0.97 percent, and the Nasdaq gained 2.35 percent. The Dow and S&P rose for the fifth week in six.

In an unexpectedly gloomy report, the Labor Department said the jobless rate climbed to 6.4 percent last month from May's 6.1 percent, a much worse reading than the 6.2 percent forecast of economists polled by Reuters. The rate reached the highest level since a matching 6.4 percent in April 1994.

"The unemployment was an unmitigated disaster," said Todd Clark, head of listed trading at Wells Fargo Securities. "Everyone thought the economy was starting to turn around or at least show some stability in the labor market, and it definitely didn't do that."

"Unemployment was higher than expected, average hourly earnings were down from a a year ago. I think the biggest thing is manufacturing payrolls were down 56,000. Initial jobless claims staying above 400,000 is not good," said James Luke, a money manager at BB&T Asset Management Inc. in Raleigh, North Carolina.

"The market is going to take some pause at this, as these were weak. We were looking across the board for better numbers than this."

Partly offsetting the disappointing jobs data was a separate report showing that the vast services sector of the economy expanded at a faster-than-expected pace last month.

The Institute for Supply Management said its index of non-manufacturing activity surged to 60.6 in June from 54.5 in May, hitting its highest level since September 2000. A reading above 50 signals growth in the services sector.

"The ISM was much stronger than expected, and that's why we're down just a bit," Clark said.

The market dipped sharply in the morning, but quickly pared losses. The Chicago Board of Trade said later that it was looking into a huge trading error in its mini Dow Jones futures contract that briefly sent the entire U.S. market reeling.

Several software companies took a hit after warning that earnings would miss analysts' estimates. Business software maker Documentum Inc. (DCTM) fell 20.5 percent, or $4.06, to $15.69. Parametric Technology Corp. (PMTC), another software maker, fell 7.2 percent, or 24 cents, to $3.08 after warning it would post a wider third-quarter net loss and lower-than-expected revenue.

But Siebel, a business software maker, finished up 26 cents, or 2.75 percent, at $9.72 as investors welcomed the company's plans to cut costs, an analyst said. Siebel received a rating upgrade from investment bank CIBC to "sector perform" from "underperform."

Boston Scientific also rose, up 0.85 percent, or 53 cents, to $62.56 because investors were encouraged the company is investing to make the product a strong seller in 2004 and beyond, analysts said.

The Standard & Poor's application software index fell 1.73 percent and was among the top percentage losers of S&P sectors.

Boeing Co. (BA) dragged on the Dow Industrials, losing 0.63 percent, or 22 cents, to $34.58. On Wednesday, the world's largest aircraft maker said it delivered 74 commercial jets in the second quarter, down 34 percent from a year earlier, on weak demand from struggling airlines.

AT&T (T) declined 46 cents to $19.42 after S&P cut the company's credit rating by one notch to triple-B, saying the telecommunications service provider has a high long-term risk profile.